Question

22. The crowding out effect is zero if A) the LM-curve is horizontal B) the LM-curve...

22.

The crowding out effect is zero if

A)

the LM-curve is horizontal

B)

the LM-curve is vertical

C)

the Fed conducts open market sales following fiscal expansion

D)

income is stimulated via a tax cut rather than an increase in government spending

E)

none of the above

23.

Crowding out occurs when

A)

an increase in defense spending causes a decrease in consumption

B)

expansionary monetary policy fails to stimulate economic growth

C)

expansionary fiscal policy causes interest rates to rise, thereby reducing private spending

D)

tax increases result in a drop in both consumption and investment

E)

a policy designed to increase the budget surplus causes the economy to enter a recession

24.

Assume the government increases government spending in an effort to increase income Y. Which is true:

A)

Y will increase more if the marginal propensity to import is very large

B)

Y will increase more if the marginal tax rate is very large

C)

Y will increase more if Investment is not sensitive to the interest rate at all

D)

Y will increase more if the marginal propensity to consume is very small

25.

Assume Ben Bernanke and the Federal Reserve increase the money supply in an effort to increase income Y. Which of the following will be true:

A)

Y will increase more if the spending multiplier is very small

B)

Y will increase more if the slope of the IS curve is very horizontal

C)

Y will increase more if the interest rate changes very little

D)

Y will increase more if Ben Bernanke denounces his predecessor Alan Greenspan
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Homework Answers

Answer #1

22. a. the LM-curve is horizontal. Horizontal LM means, there will be no change in income when interest rate changes. That means people are not responsive to change in interest rate and not changing their demand for loans and hence no crowding out.

23. c. expansionary fiscal policy causes interest rates to rise, thereby reducing private spending. Crowding out leaves little or no resources for private borrowing and hence, private investment decreases.

24.b. Y will increase more if the marginal tax rate is very large

Government Expenditure Multiplier (dY/dG) = 1/1-MPC

Increase in MPC is small means GEM is small and hence Y will also increase by a small amount.

25.  Y will increase more if the slope of the IS curve is very horizontal

Increase in money supply shift LM curve to the right and if IS is horizontal, Y will increase by the amount of increase in money supply.

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